The Ichimoku Cloud is a form of technical analysis that was developed by a Tokyo newspaper writer in the 1960’s.

The benefits of Ichimoku is that the cloud patterns (more on that later) attempt to identify an immediate trend and direction in the markets. It uses moving averages to define support and resistance zones, identifies trend and direction and also helps to gauge momentum of price action.

What many traders like about Ichimoku is that it not only uses the cloud to define support and resistance but it also uses the Kijun, Tenkan and Chikou lines that are very similar to moving averages and can help to provide bullish or bearish forward indicators.

Sometimes beginners can ignore the cloud because they feel it is complex. Although Ichimoku analysis may look complex, once you grasp the basic concepts associated with using the indicator it is relatively simple to use.

Learning the Cloud
Initially, start off by learning the names associated with the indicator:

The top and the base of the cloud act as support and resistance, but the cloud itself also helps determine trends: above the cloud is considered a bullish signal, below the cloud is bearish and within the cloud there is no prevailing trend.

Ichimoku Cloud

Source: FOREXTrader PRO

The tenkan and Kijun lines are also useful support and resistance levels and they can be used to determine bullish or bearish signals and their associated strengths.

Bullish Signals using Ichimoku analysis:Strong

Price action is above the cloud

Tenkan crosses above the kijun line and it must occur above the cloud

Chikou is also above the cloud

Medium

Price action is still above the cloud

Tenkan crosses above the kijun but this time it occurs in the cloud

Chikou is above the cloud

Weak

If price action is below the cloud and if none of the above occurs then the signal could be weak, for example, if the tenkan crosses below the kijun when it is above the cloud even if the chikou line is above the cloud it suggests the bullish trend may be weakening.

Example: strong bullish signal

Source: FOREXTrader PRO

Bearish SignalsStrong

Price action is below the cloud

Tenkan crosses below the kijun and it occurs below the cloud

Chikou is below the cloud

Medium

Price action is below the cloud

Tenkan crosses below the kijun and it occurs in the cloud

Chikou is below the cloud

Weak

If none of the above occurs then the signal could be weak, for example: tenkan crosses over kijun from above and it occurs below the cloud and the chikou is below the cloud, but price action is above the cloud.